Object Server 01: The database SQLSERVER\INSTANCE is not recognized as a model store.

The domain\user will be the service account you are using to run the AX service.
Providing this account even with sysadmin on the SQL server will not help you, as the problem is a missing stored procedure on the Master database that is created during the initial AX setup – This stored procedure is missing from your new SQL server and needs to be created manually.

* Change “AX_SERVER_NAME” to your AX server name
* Change domain\axserviceaccount to your domain and the account that runs the AX Service (If you are using NETWORK SERVICES for the service (Bad…) the use DOMAIN\MACHINENAME$ for the account)

2. In SSMS go to Databases -> System Databases -> Master -> Programmability -> Stored Procedures:
There you will find the newly created SP. Right click -> Properties

Under permissions – make sure to add the AX service account and grant it the Execute permission

The service should now start with no issues 🙂

BTW – Don’t forget that the AX service account first needs to be added as a user under security logins and granted the db_datareader, db_datawriter & db_ddladmin roles!